The world's largest retail group, Wal-Mart Stores Inc , and its rivals see India's retail sector as one of the last frontier markets, where a burgeoning middle-class still shops at local, family-owned merchants.

Allowing foreign retailers to take stakes of up to 51 percent in supermarkets would attract much needed capital from abroad and ultimately help unclog supply bottlenecks that have kept inflation stubbornly close to a double-digit clip.

Wal-Mart hailed the decision, but said it would take a close look at the fine print to see what the decision entails for its ability to do business in India.

We believe this is an important first step, said Scott Price, president and chief executive of Walmart Asia in a statement.

Raj Jain, who heads Wal-Mart India, told CNBC TV18 the decision will redefine the way consumers shop in India, but more importantly, the way supply chains in India run.

Under fire for a slow pace of reform, Prime Minister Manmohan Singh's embattled government appears to be slowly shaking off a string of corruption scandals to focus on policy changes long desired by investors.

This is a very bold move and the economic reforms process is back on track. Rajan Mittal, vice chairman of India's Bharti Enterprises, which is Wal-Mart's partner in that market, told reporters.

Millions of small retail traders vigorously oppose competing with foreign giants, potentially providing a lightning rod for criticism of the ruling Congress party ahead of crucial state elections next year.

Food Minister K.V. Thomas said the government will allow foreign direct investment of up to 51 percent in multi-brand retail - as supermarkets are known in India. It will also raise the cap on foreign investment in single-brand retailing to 100 percent from 51 percent, he added.

The new rules may commit supermarkets to strict local sourcing requirements and minimum investment levels aimed at protecting jobs, according to local media.

A heavyweight member of Singh's coalition government warned on Thursday it unequivocally opposed opening the sector.

The move is politically risky.

Fears of potential job losses could heighten popular anger at the Congress party ahead of key state polls next year that will set the stage for